February 2025 Regulatory Round-Up

1. FCA’s Dear CEO Letter to Asset Managers

The Financial Conduct Authority (FCA) issued the latest Dear CEO Letter on 26^th February 2025. In it, the FCA confirmed its current supervisory priorities, which include private markets, market integrity and disruption, consumer outcomes, sustainable finance, financial crime and market abuse.

Private Markets

Valuation practices. The FCA acknowledged the growth of investment in private markets as an asset management strategy and highlighted the valuation risk created or exacerbated by poor conflict of interest management or insufficient expertise. Potential conflicts of interest arise, in particular, where firms use in-house valuations to price transactions or to calculate fees.

The FCA confirmed that it will shortly release a multi-firm review on private market valuation practices and encouraged firms to consider the report’s findings to evaluate their valuation processes, governance framework (including information provided to the board and the valuation committee regarding valuations) and audit practices. The FCA is currently contributing to IOSCO’s review of its 2013 Principles for the Valuation of Collective Investment Schemes.

Conflicts of interest. The FCA reiterated its focus on appropriate management of conflicts of interest and noted that conflicts may increase in certain cases, e.g. multiple intersecting business lines, continuation funds, co-investment opportunities or partnerships with other financial institutions.

The FCA confirmed that it will start a multi-firm review focusing on conflicts of interest at firms managing private assets and will assess how firms oversee their conflicts of interest framework through governance bodies and the three lines of defence.

The FCA expectations of firms include active attention and updates to procedures to identify, manage and mitigate conflicts of interest.

Retailisation. The FCA will also focus on firms’ practices for product development, disclosure and distribution arrangements to retail investors, as the retailisation trend is increasingly reaching private markets.

Market Integrity and Disruption

The FCA commented on the resilience exhibited by the asset management sector in the face of volatile markets, significant episodes of market disruption and geopolitical events found by the System Wide Exploratory Scenario (SWES) report.¹ However, the SWES report also found some persistent system risks and vulnerabilities, including, e.g., rapid asset sales by asset management institutions and other non-bank financial institutions, and the FCA will engage with firms to assess how asset managers’ arrangements reflect the risks flagged by the SWES report.

Risk management practices to reflect system-wide risks. The FCA advises firms to consider the SWES report to help improve their risk management practices, including consideration of system-wide dynamics for stress testing and contingency planning. Echoing the findings of the SWES report, the FCA will focus its supervisory oversight on prudent risk management, liquidity management and operational resilience.

Liquidity risk monitoring and management. The FCA will continue to monitor liquidity risk and will take steps to ensure that the regulatory framework is consistent with the recommendations in IOSCO’s consultation paper on Liquidity Management for Collective Investment Schemes ² and the findings on margin preparedness from the SWES report alongside the FSB’s final report on Liquidity Preparedness for Margin and Collateral Calls.

The FCA will focus its supervisory efforts on firms and funds with high leverage, illiquidity or concentrated investment strategies to ensure the firms have in place appropriate risk management arrangements. Such risk management arrangements include resilient and effective operational processes and collateral management practices, including oversight of third parties where services are outsourced.

Financial Crime and Market Abuse

AML risk. The FCA flags financial crime risks in connection with investment in private assets, including fraud, money laundering (e.g. in connection with complex ownership structures), terrorist financing, bribery and corruption. The FCA re-emphasised the role of appropriate and proportionate systems and controls as key risk mitigants and the importance of effective oversight where controls are outsourced. The FCA continues to be concerned to ensure firms carry out proportionate and risk-based due diligence on investors and robust Know Your Customer (KYC) checks to identify ultimate beneficial owners.

The FCA has effectively put the industry on notice that they have specific supervisory focus on anti-money laundering (AML) controls in private market funds and will review the effectiveness of firms’ financial crime systems where weaknesses are identified. This should alert firms to review internal and outsourced AML procedures.

Market abuse. The FCA also continues to stress the importance of established, robust systems and controls for mitigating market abuse risk. The FCA restated its expectation that firms must ensure their market abuse controls enable them to discharge obligations under the Market Abuse Regulation.

Sustainable Finance

Following the introduction of the Sustainability Disclosure Requirements and Investment Labels Regime (including the anti-greenwashing rule), the FCA confirmed it will engage with firms with sustainability-related products to understand how they are implementing the labelling, naming and marketing rules and encouraged firms to use the guidance and good practice examples provided.

Next Steps

The FCA has indicated in the Dear CEO Letter its intention to make active enquiries with respect to specific areas of firms’ practices, controls and internal oversight arrangements. The FCA will seek to ascertain firms’ risk management and mitigation and conflict of interest processes and no doubt further engage with firms where it identifies weaknesses. Firms can expect enquiries from the FCA and should be prepared to engage with advisers to provide thoughtful and accurate responses to ensure careless interactions do not give rise to or affect any future enforcement action by the FCA.

2. Changes to the UK Commodity Derivatives Trading Regulatory Framework

The FCA has issued new rules in PS 25/1 concerning the scope and operation of the Commodity Derivatives Position Limits Regime. At a high level, the key changes will be narrowing of the commodity derivatives within the new position limits regime to – presently – 14 critical contracts, and the shift to the trading venues administering the position limits regime in practice.

The scope of the position limits regime will be limited to contracts for which the risk from abusive practices or disorderly trading carries the greatest potential negative impact to relevant markets; and for which position limits (and the accompanying position management controls) are effective arrangements to mitigate those risks.

The list of critical contracts is as follows, and of the below, all except WTI Light Sweet Crude Futures are currently subject to position limits.

• LME Aluminium
• LME Copper
• LME Lead
• LME Nickel
• LME Tin
• LME Zinc
• IFEU London Cocoa Futures
• IFEU Robusta Coffee Futures
• IFEU White Sugar Futures
• IFEU UK Feed Wheat Futures
• IFEU Low Sulphur Gasoil Futures
• IFEU UK Natural Gas Futures
• IFEU Brent Crude Futures
• IFEU T-West Texas Intermediate Light Sweet Crude Futures

The FCA rules will transfer first-line responsibility for setting and enforcing position limits, and the granting of any exemptions, to trading venues. The FCA expects trading venues, using pre-set criteria, to determine the framework and governance process for the setting of position limits, accountability thresholds, exemptions, ceilings and the application of over-the-counter (OTC) reporting. Similarly, trading venues will need to establish an appropriate framework to define how contracts may move into and out of the position limits regime as “related contracts” (which need to be aggregated with the critical contracts).

Trading venues must include, as related contracts, those that clearly have a direct pricing link with critical contracts, including minis of a critical contract, options on a critical contract, spreads where one of the disaggregated legs is on a critical contract, and any options - minis and spread (where one of the disaggregated legs is on a related contract) on related contracts.

Trading venues will then apply the frameworks to determine the full scope of contracts which will come into the new position limits regime and the initial limits which will be applied.

The FCA anticipates that a trading venue’s position management powers will enable it to ask relevant participants about any of its positions, whether in a related contract or not, when appropriate. Appropriate information safeguards should prevent a trading venue from using this information for purposes that are not connected with its regulatory functions.

The FCA will receive a pre-implementation notice of the details of the frameworks from the trading venues and will assess the overall framework and the initial position limits, thresholds, and related contracts and provide feedback in advance of the implementation date in July 2026.

Under the new regime, trading venues will undertake regular systematic reporting to the FCA regarding exemptions granted and any breaches of position limits or exemption ceilings. Further, the FCA will receive annual reports from trading venues on the effectiveness and operation of accountability thresholds, a summary of exemptions, any exemption ceilings, positions that exceeded those ceilings and relevant remedial actions taken.

The rules in the instrument made as part of this PS will come into force on 6 July 2026.

The FCA will commence rules that enable trading venues to receive and process applications for exemptions from position limits from 3 March 2025. Exemptions granted under the existing regime will continue to apply until 5 July 2026.

Transitional provisions relating to trading venues will commence on 3 March 2025 to allow pre-implementation notifications to the FCA by trading venues of various arrangements, e.g. the methodology for and setting of position limits and accountability thresholds, policies and procedures.

3. UK New Public Offer Platform Regime

FCA’s consultation (CP 25/3)³ is a further instalment of proposals to support the implementation and operation of the new Public Offer Platform (POP) Regime. The new regime is designed to facilitate companies making public offers of securities to a broad range of investors outside public markets when raising more than £5 million.

The proposed regime for POPs is part of the new Public Offers and Admissions to Trading Regulations 2024 (POATRs), which will replace the current UK Prospectus Regulation (UK PR) and has introduced new designated activities, including making a public offer of relevant securities and applying for the admission of securities to trading on a regulated market or a “primary MTF” (as defined under the POATRs).

The FCA proposes detailed conduct requirements for firms which will operate a POP as well as certain redress-related proposals, proposed fees and reporting requirements for firms operating a POP, and amendments to the FCA’s Perimeter Guidance manual. Further, the consultation includes proposals for the FCA’s approach to authorising and supervising firms carrying on the new regulated activity of operating a POP.

4. FCA’s Feedback Statement on Digital Wallets

Further to the joint Call for Information (CFI) on Big Tech and Digital Wallets the Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR) published in July 2024, the Feedback Statement FS 25/1 outlines the response received from stakeholders and sets out the FCA’s next steps.

The feedback highlights stakeholder concerns regarding lack of competition between digital wallets and competition between payment systems used to make payments from the digital wallets as key issues. The FCA noted it would work with the UK Competition and Markets Authority (CMA) where appropriate. In addition, issues regarding operational resilience and consumer rights and protection (including unauthorised transactions and fraud liability) were raised as potentially critical to ensure effective consumer protection.

Stakeholders also raised concerns that the current regulatory framework, including the scope of the FCA’s regulatory perimeter, is not fully effective and will need improvement, particularly to explicitly cover pass-through wallets, ensuring a level playing field and consistent oversight across different types of payment intermediaries.

The FCA will consider these issues as part of its review of the Payment Services Regulations and the Electronic Money Regulations and investigate whether changes need to be made. The PSR has noted that it intends to further engage with digital wallet providers on this issue as it continues to monitor developments in this area.

1 By the Bank of England in collaboration with the FCA.

2 See our alert on ESMA’s Consultation Paper on liquidity management mechanisms. 

3 The consultation supplements the FCA’s previous proposals in CP24/13 for POPs and the wider regime under the POATRs in CP24/12. CP24/13 sets out the FCA’s proposals for how the new rules would apply to firms operating a POP.